Casino Employee Frauds

CRAIG L GREENE CFE CPACRAIG L. GREENE, CFE, CPA

McGovern & Greene LLP

Chicago, IL

What is Fraud?

Black’s Law Dictionary defines fraud as:Black s Law Dictionary defines fraud as:

“... All multifarious means which human ingenuity can devise, and which are resorted to by one i di id l d h b f l individual to get advantage over another by false suggestions or suppression of the truth, and includes all surprise trick cunning or dissembling includes all surprise, trick, cunning, or dissembling, and any unfair way by which another is cheated.”

What is Occupational Fraud?

“The use of one’s occupation for personal The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s pp p y g gresources or assets.”

Key Elements of Occupational Fraud SchemesSchemes

1 Is clandestine1. Is clandestine

2. Violates the perpetrator’s fiduciary duties to the victim organizationsorganizations.

3. Is committed for the purpose of direct and or indirect financial benefit to the perpetrator; andfinancial benefit to the perpetrator; and

4. Costs the employing organization assets, revenue or reserves.reserves.

Legal Elements of Fraud

• A representationA representation

• About a material point

• Which is false

• And intentionally or recklessly so

• Which is believed

• And acted upon by the victim• And acted upon by the victim

• To the victim’s damage

Who Commits Occupational Fraud?

• Occupational frauds were most often committed by Occupational frauds were most often committed by the accounting department or upper management. Just over 30% of the occupational frauds were committed by

l i th ti d t t d li htl employees in the accounting department, and slightly more than 20% were committed by upper management or executive-level employees. The next-most-commonly cited department was sales (marketing and hosts in a casino environment), which accounted for 14% of the cases in the studycases in the study.

Why do They do it?

• Micro-level theories include: • Micro-level theories include:

– Differential Association

– Differential Opportunity

– Rationalization

– Psychological Theory

Why do They do it?

• Macro-level theories include:• Macro-level theories include:

– Social-psychological

– Organizational theory

– Social Disorganizationg

– Sociological theory

Structural Humiliation Theory– Structural Humiliation Theory

What Conditions within a Casino are Indicative of a High Level for Occupational Frauds?a High Level for Occupational Frauds?

• Internal controls are absent weak or loosely enforced Internal controls are absent, weak or loosely enforced.

• Employees are hired without due consideration for their honesty and integrityhonesty and integrity.

• Employees are poorly managed, exploited, abused, or placed under great stress to accomplish financial goals placed under great stress to accomplish financial goals and objectives.

• Management models are themselves corrupt, inefficient, Management models are themselves corrupt, inefficient, or incompetent.

What Conditions within a Casino are Indicative of a High Level for Occupational Frauds?a High Level for Occupational Frauds?

• A trusted employee has an insolvable personal problem A trusted employee has an insolvable personal problem, usually of a financial nature, brought about either by family medical needs, alcoholism, drug abuse, excessive

bli i t tgambling, or expensive tastes.

• The casino has fallen on hard times (i.e., is losing money or market share) or its property is becoming passéor market share), or its property is becoming passé.

• Internal audit resources are inadequate.

• Security resources are inadequate.

Accounting Red Flags

• Adjusting journal entries that lack authorization and Adjusting journal entries that lack authorization and supporting details

• Expenditures that lack supporting documentsExpenditures that lack supporting documents

• False and improper entries in accounting books and recordsrecords

• Unauthorized payments

• Unauthorized use of corporate assets

• Destruction, counterfeiting, and forgery of documents that support payments.

What to look for in an Occupational Fraudster?Fraudster?

• Unexplainable wealthUnexplainable wealth

• Refusal to take promotions

• Refusal to take time off

• Unusual hours and/or taking on additional work

• Doing jobs below their position or taking on other’s responsibilities

• Addictive behaviors – alcohol, gambling, drugs, etc.

Gaming Insider Fraud & ScamsGaming Insider Fraud & Scams

Introduction

• Casinos are a cash business and are ideal targets • Casinos are a cash business and are ideal targets for the occupational and an outside fraudster/ thief /cheat

• No other industry trades in cash the way the casino industry does (with the possible exception casino industry does (with the possible exception of the banking and finance industry)

Cage

• The Cage is the focal point for the majority of activities and The Cage is the focal point for the majority of activities and transactions on the casino floor

• It facilitates the accurate accounting of casino transactions It facilitates the accurate accounting of casino transactions and provides for a secure environment for cash handling

• Almost every transaction on the casino floor involves Almost every transaction on the casino floor involves interaction with the Casino Cage

• Can be easily corrupted if not heavily monitoredCan be easily corrupted if not heavily monitored

The Cage – Front Window Area

• Cashiers shortchanging customers who then proceed to Cashiers shortchanging customers who then proceed to extricate the stolen monies from their drawers at a later time during their work shift

• Cashiers taking money from their own drawer (and going out short) or raking monies from fellow cashier’s drawer (while the cashier is on break or not paying attention (while the cashier is on break or not paying attention, which causes them to go out short)

• Cashiers who realize that the inventory of their drawers is • Cashiers who realize that the inventory of their drawers is not fully counted down when they take over

The Cage – Front Window Area

• Closed cage drawers not being opened during the next Closed cage drawers not being opened during the next few shifts and not counted down by two employees upon closing allows for theft to occur that won’t even be di d til d t l t tidiscovered until opened at a later time

• Check scams / credit card scams

• Jet sort manipulation

• Cashiers taking money from bundled currency. Surprise Cashiers taking money from bundled currency. Surprise cash counts by cage supervisors, audit, and periodic review by surveillance can catch this type of activity

The Cage – Front Window Area

• Switching straps on bills• Switching straps on bills

• Introducing counterfeit bills

• Marker play offered by a casino can be manipulated

Main Bank Area

• Signature controls (symbolic signature vs real)• Signature controls (symbolic signature vs. real)

• Removing bills from strapped money – see comments abovecomments above

• Falsification of paperwork

• Constant errors in paperwork – sloppy writing

• Removing chips from inventory replacing them with • Removing chips from inventory, replacing them with smaller denominations

Sh ti l f f d & b • Shorting envelopes from food & beverage revenues

Main Bank Area

• Shorting fills• Shorting fills

• Short change on buys

• Introducing counterfeit bills

• Vault cashiers who realize that the inventory of • Vault cashiers who realize that the inventory of their drawers is not fully counted down when they take over

• Count team/vault collusion at the end of the count

Change Bank Area

• Shorting fill bags – Employees put less into fill bags Shorting fill bags Employees put less into fill bags than should be there and keep the rest

• Signature controlsSignature controls

• Removing tokens from inventory (replacing higher denomination tokens with lower value denomination denomination tokens with lower value denomination tokens)

• Introducing counterfeit tokens• Introducing counterfeit tokens

• Shortchanging buys for booth cashiers

• Falsification of paperwork

Count Teams

• Can the teams hide money in their shoes?• Can the teams hide money in their shoes?

• In their clothing?

• Can they leave money in a room and retrieve it later when they are supposedly coming back to “clean” the room?

• Can they collude with the count room personnel to y pkeep a canister for themselves?

Hard Count

• Removing coin from the Removing coin from the room

• Removing tokens• Removing tokens

• Falsification of scale i htweight

• Falsification of variance report and paperwork

• Shorting the wrapped coinShorting the wrapped coin

Soft Count

• Stealing bills g

• Stealing bills through foreign money or junk money money or junk money

• Shorting strapped money

• Signature manipulations

• Paperwork falsificationp

• Manipulation of counting machinesmachines

Games of Chance

Every game can be cheated from both sides of the wagery g g

Table Games

• Conducting the game (dealing the cards or tiles • Conducting the game (dealing the cards or tiles, spinning and marking the roulette ball, marking bets on the craps table, etc.p ,

• Exchanging cash for chips

• Controlling the chips and tokens

• Alerting the Supervisor of the need for a fill or g pcredit

Table Games

• Conversing with customers• Conversing with customers

• Inserting cash into the drop box

• Verifying fills and credits and signing related forms

• Controlling the insertion of items into the drop box

Scams Involving the Dealer

• Card Mechanics

• Overpayments

• Chip Cup

• Sub

• Counterfeit Chips and Tokensand Tokens

Red Flags of Table Games Frauds and ScamsScams

• Hold percentages down – analyze patterns for a • Hold percentages down – analyze patterns for a particular employee or group of employees

P bl ith i t f l i d• Problems with inventory of playing cards

• Problems with inventory of dice

• Too many fills on a shift or game

Red Flags of Table Games Frauds and ScamsScams

• Current customer or employee complaints or tips• Current customer or employee complaints or tips

• Review of Exception Reports produced by the ti d/ ill d t taccounting and/or surveillance department

• Morale issues

Slot Operations

• Fill/credits/jackpot scams abound with fraudulent j psignatures, too few employees having access to either all of the tickets and the money, the computer system and the money, etc

• EPROMS: Duplicating them and altering their p g gcharacteristics, placing already pre-programmed EPROM’s into machines to pay off in certain

bi ti tcombinations, etc

• Not the entire slot machine fill being placed into the machine hopper

TITO Scams

• Cashing out previously used or copied tickets• Cashing out previously used or copied tickets

• Cashing out unredeemed and soon to be voided ti k ttickets

• Counterfeit Tickets

• Copied Tickets Sold at a Discount

“Di t t d G b” Ti k t• “Distract and Grab” Tickets

TITO Scams

• Employee Theft• Employee Theft

• Supposed “maintenance”

• Test machines printing tickets that are cashed

• Hardware/software Malfunctions• Hardware/software Malfunctions

• Out of paper/paper jam claims

• Software not working right (power outage, etc.)

Red Flags of Slot Department Frauds and ScamsScams

• Hold percentages not within the range they should • Hold percentages not within the range they should be

E i fill hift hi• Excessive fills on a shift or a machine

• Excessive Paid outs for any particular machine

• Increased drop but decreased hold/win

E i hi t i ith t th i ti• Excessive machine entries without authorizations

Red Flags of Slot Department Frauds and ScamsScams

• Current customer or employee complaints or tips• Current customer or employee complaints or tips

• Review of Exception Reports produced by the ti d/ ill d t taccounting and/or surveillance department

• Morale issues

• Missing machines on the floor

U ll ll t f TITO’ i i• Unusually small percentage of TITO’s expiring

Marketing, Promotions and Players Clubs

• Theft of player/customer lists• Theft of player/customer lists

• Thefts of promotional items such as premiums, f l tfree play, etc.

• Transferring of points to self and/or co-conspirator

• Rigging of Contests and/or Drawings

Marketing, Promotions and Players Clubs

A soon to be published study of 39 major casinos A soon to be published study of 39 major casinos found 17 instances of fraud involving players’ club operations that were conservatively estimated at p yover $3 million in losses during a two year period of time.

N G i I id F d d SNon-Gaming Insider Fraud and Scams

Cash Receipts

Cash receipts from non-gaming activities are Cash receipts from non-gaming activities are often not as well controlled as those from gaming activities. Therefore, it is imperative, that all non-, p ,gaming cash count areas are identified and proper controls are in place.

Cash Receipts

• Unrecorded Sales• Unrecorded Sales

• Register Manipulation

• Skimming During Non-Business Hours

• Understated Sales• Understated Sales

• False Discounts

Markers (Accounts Receivable)

• Write-Off Schemes• Write-Off Schemes

• Lapping

• Stolen Statements

• False Account Entries• False Account Entries

• Theft of Checks Received Through the Mail

• Converting Stolen Checks

Concealing Skimming Schemes

• Destroying or Altering Destroying or Altering Records of the Transaction

• Inventory Padding• Inventory Padding

Detection of Cash Receipts and Skimming SchemesSchemes

• Receipt or Sales Level Detection• Receipt or Sales Level Detection

• Check Conversion Detection

• Journal Entry Review

• Surprise Cash and Bank Reconciliations• Surprise Cash and Bank Reconciliations

• Detecting Lapping of Markers

Accounts Payable/Purchasing

The procurement cycle is generally divided into The procurement cycle is generally divided into three typical classes of transactions:

A i iti f d d i d i th i • Acquisition of goods and services used in their current form, processed or blended in some manner to provide the goods or services for sale;manner to provide the goods or services for sale;

• Payments for goods and services (i.e. Cash Disbursements); andDisbursements); and

• Goods returned to suppliers.

Common Fraud Schemes

• Fictitious Vendor Schemes - The Shell Company• Fictitious Vendor Schemes - The Shell Company

– Forming a Shell Company

– Submitting False Invoices

Red Flags of a Fictitious Vendor Scheme

• Photocopying and TamperingPhotocopying and Tampering

• Consecutive Invoice Numbers

• Invoices with a P.O. Box, Mail Drop Box and/or Without Phone Number

• Similar Addresses and/or Phone Number

• Similar Vendor Names

Red Flags of a Fictitious Vendor Scheme

• Invoice Review ThresholdsInvoice Review Thresholds

• Multiple Companies with the Same Address and Phone NumberNumber

• Unexplained Inventory Shrinkage

• Unexplained Budget or Cost Overruns

• Shell Company Brokerage Schemes

Manufacturer/Wholesaler/Service

ProviderProvider

Invoice Check

Shell BrokerageCompany

Goods and/orServices

Invoice plus“Markup”

Check, including“Markup”

VictimOrganization

Red Flags of a Shell Brokerage Schemes

• Brokerage and/or Sales Brokerage and/or Sales Companies

• Change in the • Change in the Procurement Process

Non Accomplice Vendor Schemes

Pay and Return SchemesPay and Return Schemes

• Overpaying by remitting $10,000, instead of the $1 000 that is in oiced$1,000 that is invoiced;

• Paying an invoice twice; and

• Sending one vendor’s check to another vendor

Methods Used by the Corrupt Employee

• Depositing the check into their bank account by • Depositing the check into their bank account by adding a second endorsement

O i b k t i th f th Vi ti • Opening a bank account in the name of the Victim Organization and using their name as the signatory on the accountsignatory on the account

• Cashing the check at a currency exchange or other financial instit tionother financial institution

Red Flags of a Pay and Return Schemes

• Duplicate Payments• Duplicate Payments

• Nearly Identical Payments

• Duplicate Vendor Information

• Vendor Complaints• Vendor Complaints

• Increased Vendor Purchases

Overbilling with a Non Accomplice Vendor’s InvoiceInvoice

• Altering the invoice’s remittance address of the • Altering the invoice s remittance address of the vendor through correction tape or fluid and using a photocopy of the invoice to submit for payment.p py p y

• Scanning and altering the invoice using computer technologytechnology

Overbilling with a Non Accomplice Vendor’s InvoiceInvoice

• Creating a Non Accomplice vendor invoice • Creating a Non Accomplice vendor invoice through downloading logos and other graphics, product and pricing information from the Internetp p g

• Changing the remittance address and/or payee on the Master Vendor file for the Non Accomplice the Master Vendor file for the Non Accomplice vendor to an address/shell company controlled by the Corrupt Employeep p y

Red Flags of a Non Accomplice Vendor Overbilling SchemeOverbilling Scheme

• Alterations Photocopies and Modifications• Alterations, Photocopies and Modifications

• Inconsistent Remittance Addresses

• Invoice Appearance

• Master Vendor File• Master Vendor File

• Vendor Complaints

• Increased Purchases

Inventory for Resale & Fixed Assets

Inventory for Resale• Items of tangible personal

property which are held

Fixed Assets• Tangible assets that are

owned by the casino property which are held for sale in the ordinary course of business

owned by the casino and are permanent or have a long life, and are used in normal business operations

Red Flags of Fixed Asset Fraud

• Unusual or unexpected asset purchases.Unusual or unexpected asset purchases.

• Unusual or unexpected fluctuations in the account balance including unexplained changes in the balance, including unexplained changes in the depreciation accounts.

A t th t t b l t d• Assets that cannot be located.

• Pattern of high number of occurrences of reported theft of assets.

• Pattern of unusual number of reports of damaged Pattern of unusual number of reports of damaged assets.

Investigative Techniques to Identify Fixed Asset FraudAsset Fraud

• Perform physical counts of fixed assets, including p y , gcomputer software.

• Analyze depreciation schedules for unusual Analyze depreciation schedules for unusual patterns.

• Compare fixed assets purchases for multiple • Compare fixed assets purchases for multiple years.

• Analyze salvage and scrap sales for unusual patterns.

• Review surveillance cameras videos, if available.

Payroll Fraud

• Ghost employees• Ghost employees

• Overpayment of wages

• Withholding tax schemes

• Bogus claims• Bogus claims

Detection

• Independent payroll distribution• Independent payroll distribution.

• Analysis of payee addresses or accounts.

• Search for duplicate Social Security Numbers.

• Overtime review• Overtime review.

• Analysis of deductions.

• Investigating other employee’s complaints.

Detection

• Investigating employees who have a pattern of • Investigating employees who have a pattern of on-the-job injuries.

I ti ti l h h l t • Investigating employees who have a large amount of claims paid to themselves.

• Reviewing patterns of employee conduct (i.e. employees from the same area that have a large amo nt of inj ries )amount of injuries.)

Petty Cash Funds and Employee Expenses

• Fictitious expenses• Fictitious expenses

• Altered expenses

• Mischaracterized expenses

• Duplicate reimbursements• Duplicate reimbursements

Detection

• Budget variance reports which compare the actual • Budget variance reports which compare the actual vs. budgeted expenses by cost center.

R i b t t i t i • Reimbursements over a certain amount or in even amounts.

• Reimbursements charged to unusual accounts.

• Accounts which have unusual activity, that is, high y, , greimbursements at the end of a fiscal period

Corruption Schemes

Corruption Schemes

• Submit Fraudulent Billings And Approving • Submit Fraudulent Billings And Approving Payment

S ll E i P t O S i• Sell Excessive Property Or Services

• Inflate Prices

• Receive Favorable Payment Terms

Ri Bid• Rig Bids

• Eliminate Competition

Official Bribery

• Giving or receiving (or offering or soliciting)• Giving or receiving (or offering or soliciting)

• Any “thing of value”

• To influence

• An official act• An official act

Official Bribery

• Sexual Favors

• Promises of Employment or other Favorable Treatment Treatment

• Vacations

• Payment of Credit Cards

• Loans

• Hidden Interests in Property

• Transfers at Below Market Value

Commercial Bribery

• Giving or receiving (or offering or soliciting)Giving or receiving (or offering or soliciting)

• Any “thing of value”

• To influence

• A business decision

• Without the employer’s knowledge and consent

Life Cycle of a Kickback Scheme

Victim’s Employee• Close Socialization:

Corrupt Vendor• Favorable Treatment:

– Lunches, Dinners, etc.

– Sporting Events

– Excusing poor or non performance

Sporting Events

– Vacations– Leniency in completion

dates and quality i issues

– “Vendor is Protected”

Life Cycle of a Kickback Scheme

Victim’s Employee• Gifts and Gratuities:

Corrupt Vendor• Decreasing Competition:

– Excessive gifts and gratuities being

i d b l

– Sole source awarding when bidding would be

f blreceived by employee more favorable

Life Cycle of a Kickback Scheme

Victim’s Employee• Sudden Wealth:

Corrupt Vendor• Increase in Pricing:

– New Cars

– Expensive Vacations

– Change in Purchase Orders

Expensive Vacations

– Expensive Clothes, Jewelry

– Change Orders in Construction

Jewelry– Fictitious Invoices

Life Cycle of a Kickback Scheme

Victim’s Employee• Living Beyond One’s

M

Corrupt Vendor• Increasing

S l /B iMeans:

– New Home

Sales/Business:

– Vendor is given more and

– Country Clubsunrelated business opportunities for the Victimc

Economic Extortion

• A demand of payment by the recipient• A demand of payment by the recipient

• To refrain from discriminating against

• A business decision

Economics of the Transaction

1 Inflating the selling price to the Victim to include 1. Inflating the selling price to the Victim to include the corrupt payment.

2 Shi i l lit d idi l 2. Shipping lesser quality goods or providing lesser quality services to reduce the Corrupt Payer’s operating costs to provide for the corruption operating costs to provide for the corruption payment.

3 De iating from the specifications of the items or 3. Deviating from the specifications of the items or services purchased.

How a Bribe Scheme Works

• Wife using a pre-marital name when the Wife using a pre marital name when the employee is a male or the husband where the employee is the wife and uses her pre-marital name.

• Children of the employee.Children of the employee.

• Close personal friend or life partner of the employeeemployee.

• In-laws of the employee with a different last name.

• Other acquaintance

Corrupt Payer’s Organization

• Sales Commissions• Sales Commissions

• Brokerage Fees

• Maintenance

• Professional Fees• Professional Fees

• Consulting Fees

• Outside Services

Conflicts of Interest

• The Casino should expect their employees to • The Casino should expect their employees to perform their responsibilities in a fair and an unbiased wayy

• Conflicts of Interest arise when the Organization’s officials and/or employees are influenced by officials and/or employees are influenced by personal interests when doing their job.

Red Flags of Corruption Schemes

• Employee Handles All Matters Related To a • Employee Handles All Matters Related To a Vendor

V d Wh R i I di t A t f • Vendors Who Receive an Inordinate Amount of Business for No Apparent Business Reason

• Paying False Invoices either Self-Prepared or Obtained Through Collusion with Suppliers

• Vendor Salesmen Make Frequent, Unexplained Visits to Purchasing/ Contracting Personnel

Red Flags of Corruption Schemes

• Prices from a Particular Vendor Are Unreasonably • Prices from a Particular Vendor Are Unreasonably High When Compared To Others

• Quality of Goods or Services Received From a • Quality of Goods or Services Received From a Vendor Is Low

I P h d D N M S ifi i• Items Purchased Do Not Meet Specifications

• Tips or Complaints Received From Other Employees or Honest Vendors

• Key Contracts Awarded With No Formal Bid yProcess

Right to Audit Clauses

"Seller shall establish a reasonable accounting system Seller shall establish a reasonable accounting system, which enables ready identification of seller's cost of goods and use of funds. Buyer may audit seller's records anytime b f th ft fi l t t if b ' before three years after final payment to verify buyer's payment obligation and use of buyer's funds. This right to audit shall include subcontractors in which goods or services are subcontracted by seller. Seller shall insure buyer has these rights with subcontractor(s).“

Summerford Ralph Reserving the Right to Audit the Suspicious Vendor The White Paper Association of Certified Summerford, Ralph - Reserving the Right to Audit the Suspicious Vendor, The White Paper, Association of Certified

Fraud Examiners.